Episode summary
Roth Conversions vs. RMDs: Which Tax Bill Hurts More?
Your Money Your Wealth
· · 44 min · Hosts: Joe Anderson, Big Al Clopine · Guests: Aaron, Mike, Bob the Builder, Marion, Stephen, Lu, Tony, John, Peggy, Rajesh, Wayne
Summary
The episode focused on retirement tax planning questions around Roth conversions, required minimum distributions, and the five-year rules that govern Roth withdrawals. For a 56-year-old with about $1.1 million in a pre-tax 401(k), the hosts argued that Roth conversions may make sense in retirement, likely up to the top of the 12% bracket, with occasional larger conversions in down markets. They also said his future RMDs should be manageable because his spending needs are about the same size as the projected distributions.
They clarified that pension income can be used to fund a Roth IRA only if the taxpayer has enough earned income to support the contribution limit, and they walked through the UTMA-to-529 idea as a tax-free education strategy with important limitations on beneficiary changes. On Roth rules, they said an inherited Roth can become fully tax-free after the relevant five-year period, but the beneficiary may need to wait out that clock if the account was not seasoned long enough.
The hosts also pushed back on the idea that future income gets ignored in retirement projections. They said pensions, Social Security, and rental income should be part of the picture, but a quick spitball can only go so far without a full plan.
Key takeaways
- For Aaron in Syracuse, the hosts said Roth conversions in retirement likely make sense, probably around the 12% bracket and sometimes the 22% bracket if the market is down.
- For Mike in Texas, the hosts said pension money can fund a Roth IRA only if he has enough earned income to cover the contribution limit.
- For Marion, the hosts said an inherited Roth IRA can become tax-free after the five-year rule is satisfied, even on earnings.
- For Stephen, the hosts said future pension and Social Security income should be included in retirement planning, but back-of-the-envelope math has limits.
- For Tony and his wife, the hosts said they should probably keep saving and consider a Roth option in the 403(b) rather than assume RMDs will be a problem.
Notable quotes
“I think you maybe upon retirement, I think you do Roth conversions maybe to the top of the 12% bracket”
“as long as you have earned income, I was going to say under earned income salary for example, as long as you have enough salary to cover what a Roth contribution would be”
“we we can't we we can't do multiple incomes, I mean just on the back of an envelope”
How the episode opens
So, while I was busy visiting with my oncologist recently, I asked Joe and Big Al to do a stack of rapid-fire spitballs for you on everything from Roth conversions and RMDs
To whether a guy named Wayne can finally treat himself to a $75,000 Audi. Today on Your Money, Your Wealth podcast number 587. Aaron in Syracuse just hit a million bucks in his 401k and realizes he needs a spitball on keeping his RMDs low.
Do new Roth conversions restart the 5-year clock? 72-year-old Mike in Texas wants to know. Marion inherited a not-yet-5-year-old Roth and an Irma problem as well.
Lou and Stephen each argue that the fellas' conversion and retirement spitball math might be misleading. Teachers Tony and his wife have pensions that cover everything, so should they even keep saving? John and Peggy need a retirement spitball.
Rajesh wonders if he should pay his mortgage or convert to Roth. And Mike in San Marcos asks about funding a Roth with pension money. Let's see how the fellas did.
I'm executive producer Andy Last, and my cancer treatment is working, by the way. Woohoo! And here are the hosts of Your Money, Your Wealth, Joe Anderson, CFP, and Big Al Clopine, CPA.
Andy Last is not here, but she's here. — She Well, how does What do you mean? — She's not here now, but she will be — She will be later. Got it. She'll come in and and post. — I think so. — Okay.
I hope so. — Me, too, cuz we're nothing without her. — So, um so, yeah, we're going to bust through a couple of questions just to keep us on task. — Okay. — All right, let's go to Syracuse, New York. Hello, friends.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- roth conversions
- rmd strategies
- 5-year clock
- irmaa
- retirement tax planning
Companies and tickers mentioned
- Pure Financial Advisors
Watch the episode
Watch “Roth Conversions vs. RMDs: Which Tax Bill Hurts More?” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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